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On the latest Canada-U.S. wealth comparison debate

Interesting debate over at the National Post between Andrew Coyne and Jonathan Kay over what to make of data that’s been interpreted as showing that Canadians are now on average richer than Americans.

Kay says this statistical trading of places challenges cherished assumptions of Canadian conservatives, who have long looked admiringly at the more freewheeling style of U.S. capitalism. Coyne counters that the apparent increase in Canadian household wealth relative to American averages is based, not on some advantage in Canada’s economic model, but on the recent rises in oil prices and the Canadian dollar, set against a plunge in U.S. real estate values.

As usual, Coyne makes strong points. Still, I agree with Kay to the extent that Canadian conservatives can hardly say, “Well, Canada-vs.-U.S. comparisons were instructive back when Canada was coming up short, but are deceptive now that Canada is coming out ahead.” If short-term changes in a few factors—commodity and currency fluctuations, U.S. house prices—can seem to make such a signal difference, then maybe these stats never provided a very well-rounded picture in the first place.

If we’re going to try for a better understanding of the Canada-U.S. contrast, there are a few points I think are worth keeping in mind.

For starters, the foundation of many a conservative critique of the Canadian economic policy mix has been that our governments are too big, as evidenced by higher taxes. Looking at the OECD numbers, total tax revenues in Canada and the U.S. were about the same back in 1965, roughly 25 per cent of gross domestic product. After that, they diverge. Between the mid-1970s and the present day, Canadian taxes as a share of GDP have run six to eight points higher than U.S. levels; in 2010, Canadian taxes totaled 31 per cent of GDP, while U.S. taxes were 25 per cent.

In other words, Canadian taxes overall were higher during periods when our economy looked weaker and higher during stretches, like right now, when our economy looks stronger. So if we’ve had a problem, that doesn’t seem to have been it. And if we’ve fixed something, it must have been something else.

There’s how much we tax and then there’s how we spend. Both Kay and Coyne put a fair amount of emphasis on social spending cuts under the Liberals in the mid-1990s. I’ve argued before that cuts during that deficit-slaying period have been over-emphasized and tax revenue gains under-appreciated. Still, it’s true Paul Martin’s budgets imposed serious short-term reductions in transfer payments to the provinces, funds largely meant for health and education. But after the federal books were balanced, those transfers bounced quickly back to previous levels—and then well above.

Here’s one way to sketch the social transfers story: payments to the provinces ate up 16.6 per cent of federal spending when Jean Chrétien assumed power in 1993-94, dipped to 13 per cent in 1997-98 during the deficit-slaying period, and had risen to 19.5 per cent by the time Stephen Harper took over in 2005-06—about where the Conservatives have kept transfers ever since (this data from Finance Canada tables).

So Canadian social spending wasn’t permanently scaled down by the experience of 1990s. Another Chrétien-era legacy that’s much discussed in the context of the Canada-U.S. comparison is financial-sector regulation. My sense is that the crucial differences in regulation between the two countries are not widely understood.

John Palmer, the former top federal banking watchdog, told me for this story a couple of years ago that the key to Canada’s 1996 reforms was that the Office of the Superintendent of Financial Institutions was given the authority to issue highly discretionary instructions to banks as dubious lending patterns or other vulnerabilities on their balance sheets took shape. So the subprime mortgage portfolios taken on by U.S. banks before the 2008 market meltdown would have set off OSFI’s alarms, at least in theory, before they grew so recklessly huge.

The willingness and ability of Ottawa to impose this more assertive banking regulation tells us something. So do the persistence of higher Canadian taxes and the resilience of federal transfers for provincial social programs. Only a few years ago, regulation, taxation and social spending were routinely cited as serious Canadian economic liabilities. Lately, you don’t hear that so much.

It might be simplistic to assert that these three broad factors have actually made Canadians richer, but it’s fair by now to observe that they certainly haven’t consigned us to being poorer.

What fascinates me is that while western countries have different cultures and values…. and economic systems…..and they argue endlessly about whose system is best…..they all have pretty much the same standard of living.

The solid state of Canadian bank regulation is basically a joint effort of the Trudeau and Mulroney governments….begun and studied under Trudeau after early seventies hiccups, implemented under Mulroney.

There is one fact that explains it. The average Canadian home is worth $140,000 more.

Since Canada is in a housing bubble and the USA just popped one, that won’t remain true for long. The housing wealth in Canada is inflated. And frankly, the average Canadian home is no better, no nice, no grander than the average American home.

There is another fact that also explains much. Canadians, on average, are three years older. Multiple that by the average household size and you have a number of years of earnings difference.

Another consideration is Canadian spending power is lower, since of course sales tax is higher by about 10%. So that’s another 10% difference. In general purchasing power parity (PPP) differs.

Canadians may have gained somewhat, but I don’t think they’re richer.

The same study showed that American households have 70% more annual disposable income.

Though the value of the average Canadian home seems inflated by speculation on land value I think our homes cost most to build than a home in the US. We dig deeper holes to start with and it continues through the process, partly to deal with our climate and partly because prices for materials are higher.

Great interview with Julie Dickson OSFI. Agree with JG that financial-sector regulations are what saved our butts. Between Carney and Dickson, Canada rocks!!

“The system inherited by Dickson had undergone three decades of increasingly stringent regulation and tighter oversight that included the introduction of liquidity leverage ratios in the 1980s, increases in capital provisions in the 1990s and an industry wide ban on consolidation.

It’s a legacy that has helped bolster OSFI’s reputation. Dickson said that one of the most important things she accomplished in the past five years is to found and chair a group of supervisors within the Financial Stability Board. There, she has had the chance to bring the Canadian regulatory style to her global peers — you don’t always have to be right, but you always have to be ready. ”

Is the US a better example of freewheeling capitalism than Canada any more? If you look at government spending as a % of GDP, the two countries have nearly converged (US: 38.9%, Canada: 39.7%). What is more, due to their higher deficit, they are going to overtake us as interest payments increase. We also rank similarly in measures of economic freedom.
We tend to overemphasize the supposed difference between “capitalist” American healthcare and our single payer model. The reality is that the US government spends more per capita on healthcare than we do through Medicare, Medicaid, the employer-based health care subsidy, and now Obamacare. The difference between Canada and the US in healthcare isn’t about the degree of government involvement, but rather, about the nature of government involvement. And we tend to underemphasize instances where the Americans have taken a big government approach. US military spending as a % of GDP dwarfs that of Canada, for instance.

This is a temporary juncture. Canada has two cities that matter in real estate, Toronto and Vancouver. These cities have not corrected after years of fantastic price appreciation although there are signs of a buyer strike now. Everywhere else in Canada, prices are much, much lower for homes.

The US has seen a huge overshoot of housing prices up to 2007. Now the US has seen a comparable undershoot as prices collapsed.

Equilibrium will have its way. Either Canadian prices will fall or US prices will rise. I suspect both will occur. So its not useful to make any other observations than the relative and temporary price of housing and to some extent – commodities.

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